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E2 - Ensuring Success: B787 Enhancing Sustainability

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Presentation on theme: "E2 - Ensuring Success: B787 Enhancing Sustainability"— Presentation transcript:

1 E2 - Ensuring Success: B787 Enhancing Sustainability
Karmen Chan – Airplane Programs Jonathan Loh – Commercial Sales Berton Lim – Engineering, Operations & Tech. Andy Neo – Finance

2 The Current Market Outlook
Outsourced Manufacturing – Growing Trend Refocusing: High Value, Core Competence Emerging Markets, Emerging Threats Countering Threats, Sustaining Advantage Standards BioFuels, Emissions Standards Exogenous Events Shorter Economic Boom-Bust Cycles

3 E2: Ensuring & Enhancing
Core Competence & Competitive Advantage Enhancing Sustainability Strong New Ecosystem Ensuring Success: B787

4 Timeliness & Reliability
Managing Labor & Vendor Relationships will Deliver the B787 On Time, On Target Timeliness & Reliability Improved Quality ? Communicates and convinces customers Objectives -To supplement supplier development activities that Boeing is currently engaged in to enhance suppliers’ overall capability of continuous improvement  Leads to improved quality of components for B787, leads to improved processes that will quicken production process to ensure timely delivery to Boeing -Ensure that the same set of processes, principles and methods flow down each suppliers’ network consistently  For every first-tier supplier, they’re supported by a network of lower-tier suppliers. It is crucial for the alignments of processes and principles among the ENTIRE network to ensure quality and timeliness. Ensure

5 Ensuring Vendor Performance: Tuning-Up & Providing Suppor
OBJECTIVES The Boeing Vendor Tune-Up Program Execution Align process & quality standards Continuous improvement in processes Global MoonShine mobile teams Regional Mobile team to support Knowledge sharing Focus groups with MoonShine team Every 2 months Periodical refresher courses Ensure

6 Training & Rewarding the NextGen Boeing Workforce
Key concerns Recommendations Competitive compensations Existing formula with periodical changes Long-term incentivization A shift to variable wage- Collective Business Performance 1 min Situation: Boeing has set its bet on this revolutionary product, the 787, the revolutionary global supply chain process and to prevent failure, the best resources need to be dedicated to this project. Therefore, machinists and engineers need to be incentivized and motivated in delivering their skills to the highest level. And to avoid future back-to-back strikes. Machinist Union strike provided the precedent for the engineers to stage a strike in a bid to demand better compensation packages. Joe Campbell, an analyst with Barclays Capital, said the details of Boeing's third-quarter earnings, released last week, give a window into the hit to company profits in the strike's first 24 days: about $685 million pretax, he estimated. Extrapolating from that figure, he said a strike of about 55 days would cost Boeing some $1.5 billion in profits. Adding in the extra expenses that Boeing will incur in recovering to pre-strike rates of production -- paying suppliers for overtime, expedited shipping and other extras, as well as the costs of additional delays on the the true cost of the strike is likely to be well above $2 billion, Campbell estimated. Solution: Settlements  Look at these to ensure future compensation packages are holistic and competitively pitched to retain machinists and engineers, key human resource capabilities that the company can hold on to as a rare and difficult to imitate advantage. Job security Training program: Increase skill sets to perform higher value-adding functions Ensure

7 Managing Labor & Vendor Relationships will Deliver the B787 On Time, On Target
Timeliness & Reliability Improved Quality The Boeing Vendors Tune-Up Program Rewarding and Training NextGen Boeing Workforce Communicates and convinces customers Objectives -To supplement supplier development activities that Boeing is currently engaged in to enhance suppliers’ overall capability of continuous improvement  Leads to improved quality of components for B787, leads to improved processes that will quicken production process to ensure timely delivery to Boeing -Ensure that the same set of processes, principles and methods flow down each suppliers’ network consistently  For every first-tier supplier, they’re supported by a network of lower-tier suppliers. It is crucial for the alignments of processes and principles among the ENTIRE network to ensure quality and timeliness. Ensure

8 E2: Ensuring & Enhancing
Core Competence & Competitive Advantage Ensuring Success: B787 Strong New Ecosystem Enhancing Sustainability Ensure Enhance

9 Buy-to-Build Ratio: Are we Outsourcing too much?
Ensure Enhance

10 Buy-to-Build Ratio: Are we Outsourcing too much?
Situation: 70% outsourcing down to approximately 60% Implication: Built up experience & complex knowledge Conclusion: Leverage on 787 experience for future Result of purchase of Vought Testing commenced Steep learning curve Leaders in Global Supply Chain Mgmt Inevitable of the future Establish leadership StarShine to support outsourcing Ensure Enhance

11 Emerging Threats: China at the Top
Ensure Enhance

12 Resulting Implications of Threats
Situation: Economics Influence Outsourcing Implication: Manufacturing more Overseas - BUT Solution: Focus on Higher Value Work Outsourcing not for cost Manufacturing less of an advantage tomorrow Financial Risk Reduced Allows Foothold in Key Markets Allows Focus on Core Competency Design & Systems Integration Excel in Project Mgmt Making it difficult to replicate Ensure Enhance

13 With the Threat: Our Core Competencies & Advantages will be:
Gold Standard in Project Management Higher Value Work Foundation: Innovation Higher value SI work – making planes fly, making them work together Not just manufacturer of key parts – 50:50 BB ratio The BEST Project Manager in the aviation industry Ensure Enhance

14 What’s next beyond 787? Starshine Nanotechnology
Specialised unit focusing on Project Management Excellence Enhance aircraft performance through better materials Ensure Enhance

15 StarShine: Developing Project Management Excellence
Goals Reach new frontiers in project management Improve programs time-to-market speed Functions Support and collaborate with program teams Ensure good performance in order to reduce developmental delays; keep production schedule on time Ensure Enhance

16 Why StarShine? 1 Engagement
Assist, support program teams in project management Share best practices – across industries/internally 2 Excellence Good ideas from collaboration between experts Timely delivery of planes, improvements in production processes 3 Epitome Improve project management capabilities Attain sustainable competitive advantage that are not easily replicated; create ecosystem of gold standards Ensure Enhance

17 Nanotechnology Nanotechnology
Open new frontiers with emerging technology Explore long-term potential of enhancing aircraft performance Source: U.S. Committee on Aeronautics Research and Technology Goals Functions Apply new composite materials to aircraft design Research work with UW Centre of Nanotechnology Ensure Enhance

18 Why Nanotechnology? 1 Impact
Relevant to most aircraft components and systems Source: Bax and Willems Consulting Eg: Airframes, windows 2 Improvement Better material properties that boost functional performance Added protection during harsh weather conditions 3 Innovation Build up collective suite of capabilities from investment Be the leading edge of innovation and material science development Ensure Enhance

19 E2: Ensuring & Enhancing
Core Competence & Competitive Advantage Ensuring Success: B787 Strong New Ecosystem Enhancing Sustainability Ensure Enhance

20 Financial Implications with our Recommendations
Incremental Profit of USD 3.5 Billion Ensure Enhance Financial

21 Reaffirmation of Our Strategy with Positive NPV
USD 3.63 Billion Ensure Enhance Financial

22 Financial Assumptions & Justifications
Valuation Assumptions 15 Year Time Horizon 3 Stage Growth Model CAGR Growth Rate of 12.96%, followed by 6% Terminal Growth Rate of 3% WACC of 10.71% Qualitative Assumptions Commercial Airline to be key driver of growth Assumed On Schedule Delivery of the 787 Treating Nanotechnology as a call option Ensure Enhance Financial

23 Identifying the Risks Sensitivity Analysis Ensure Enhance Financial
10,604.07 9,870.9 2,894.42 -2,622.77 -3,359.94 Ensure Enhance Financial

24 Milestone & Implementation: E2: Ensuring & Enhancing
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 ENSURE – Tune-Up & Global MoonShine Program ENSURE – Wage Restructuring ENSURE – Training Program ENHANCE – StarShine Team ENHANCE - Nanotechnology -- Due Diligence & Approval -- Planning & Development Execution & Quarterly Review -- Union Negotiations Execute & Quarterly Review -- Union Negotiations Execute & Quarterly Review -- Development & Staffing --Training & Field Trips Execution & Quarterly Review --Training & Field Trips Continuation of PhantomWorks Research & Development Commercial Application for New Products & Variants-- Global Educational Institution Research Tie-Ups Ensure Enhance Financial Milestones

25 Milestone & Implementation: E2: Ensuring & Enhancing
2022 2023 2024 2025 2026 2027 2028 2029 2030 ENSURE – Global MoonShine Program ENSURE – Wage Restructuring ENSURE – Training Program ENHANCE – StarShine Team ENHANCE - Nanotechnology Execution & Quarterly Review Execute & Quarterly Review Execute & Quarterly Review Execution & Quarterly Review --Training & Field Trips --Training & Field Trips --Training & Field Trips Global Educational Institution Research Tie-Ups Commercial Application for New Products & Variants Ensure Enhance Financial Milestones

26 E2: Ensuring & Enhancing
Strong New Ecosystem Ensuring Success: B787 Stabilize Labor Relations – Satisfaction & Productivity Strengthen Vendor capabilities – Tune-Up Enhancing Sustainability StarShine Program – Gold Standard in Project Mgmt Forever New Frontiers - Nanotechnology Core Competence & Competitive Advantage Ensure Enhance Financial Milestones Summary

27 Question & Answer

28 Index – Presentation & Supplementary Slides
Resilience & Customer Centricity Our 787 vendors What has been done to fix 787 program Surveilance tools Do we have the right partners? Too much outsourced overseas argument Compensation packages Holistic packages What is Moonshine? BioFuels Consideration Why not a SonicCruiser? Outsourcing reasons Why not Backward Integrate with Vendors?? Airbus A350XWB v. Boeing B787 specs Cargo Market Importance of designing the right plane Commercial aircraft industry analysis StarShine Structure StarShine roles Nanotechnology details DCF Pro-Forma Income Statement Delivery Schedule (1) WACC Calculations Cost of Debt Calculations Tax rate Boeing brief financial performance Profit Stability of Boeing Opportunity costs assumptions Growth rates Positive trends for nano Presentation Slides Current Market Outlook Overview Tuning-Up & Providing Support Training & Rewarding NextGen Therefore Ensuring Success: B787 How much are we outsourcing Implications of outsourcing Emerging Threat Review: China Implications of China Threat Our Core Competence & Advantages What’s Next Starshine Why Starshine will succeed Nanotechnolgy Why Nanotechnology will succeed Pro-forma Net Profit with recommendations Positive NPV Assumptions & Justification Sensitivity Analysis Implementation

29 Resilience to new technologies & Customer-centricity
Success with new technologies Customer centric Approach First commercial aircraft to be designed entirely on computer via CAD software system from Dassault Systemes & IBM Success: Physical mock-up of nose section built to verify results of program and was successful Even wider fuselage cross-section demanded by airlines Fully flexible interior configurations Operating costs lower than any B767 Opted for twin-engine configuration given past design successes Largest diameter turbofan engines of any aircraft

30 Vendors for B787 Project United States Europe Japan/Korea China
Boeing Charleston (announced as Vought Aircraft Industries) Spirit Aerosystems Inc Hamilton Sundstrand Rockwell Collins Honeywell Goodrich General Electric Moog Inc Toray Industries Alenia Aeronautica GE Aviation Messier-Dowty Dassault Systèmes Eaton Aerospace Rolls-Royce Thales GKN Aerospace Japan/Korea China Suppliers: Answering Part (a) Fuji Heavy Industries Kawasaki Heavy Industries Mitsubishi Heavy Industries Panasonic Bridgestone Korean Airlines - Aerospace Division Shenyang Aircraft Coporation BHA Aero Composites Manufacturing Hafel Aviation, Harbin Chendu Aircraft

31 What has been done? Virtual collaboration environments supporting development activities by suppliers in multiple countries. Product lifecycle management software allows for collaboration through design and development phase in performing all engineering tasks and capturing design errors prior to production RFID and unique identification and maintenance and inspection data conforming to industry standards Surveillance Tools to monitor Ad-hoc, short term quick fixes Both Airbus and Boeing believe that RFID could provide major benefits for the entire aerospace industry. RFID data can give more accurate estimates of demands for parts; both manufacturers and suppliers are therefore able to decrease their parts inventory. Furthermore, information stored on RFID tags can facilitate monitoring and tracing the statues of parts, making maintenance easier and reducing the time required to solve in-service problems or generate inspection reports.

32 Surveillance Tools to Monitor Vendors’ Performance
On top of already stringent inspection protocols, we want to up the vendor development activities to further ensure quality and timely performance from vendors Source:

33 Do we have the right partners?
Purpose of outsourcing Spread risk Seek financial resources Lower spending on R&D Gain greater access to new markets Asia Pacific Boeing & Japan Japan responsible for approximately 35% of designing and manufacturing airframe structures for B787 R&D work on new tech for Boeing, including composites for B787 Japanese government subsidy: up to USD$3billion Boeing & China Gain access to new markets: China will be the world‘s second largest market for new commercial airplanes with a projected demand for 2,600 aircraft valued at $213 billion over the next 20 years. Source: Boeing Current Market Outlook 2009 Taking the position of a system integrator on the 787 program, Boeing had delegated the entire responsibility for wing design and production to its Japanese partners, while it also has assigned a significantly greater share of the work to the Chinese suppliers. In contrast, Airbus, while it also engages in industrial offset agreements, it has typically elected to do so in connection with the older Airbus aircraft models (Pritchard and MacPherson, 2005). This is probably a main reason explaining why Airbus seems to be facing many more difficulties in Japan than in China. Decades of technology development through extensive involvement in Boeing’s projects have helped the Japanese companies to establish a leadership position in wing design and composite technology. Now, Japanese companies, with government support, have set their sights on becoming a major force in aircraft manufacturing in competition with the U.S. and European producers. The fact that Airbus is still keeping in-house the development of its cutting-edge technologies82, such as composite materials and wing design, makes their cooperation with Airbus apparently less appealing. Although China is also eager to develop its aviation industry, it has a more urgent need: more jobs for local people. Hence, the one willing to offer more local job opportunities and develop local human resources is more likely to be received with greater favor. Furthermore, the friendly political relationships between China and E.U., along with Airbus’ own strong “PR machine” (as noted by one of the interviewees for this research) has also helped further Airbus’ sales in China. Meanwhile, Boeing’s long-term dominance in Asia may have led to some 82 “As Competition Heats up, Jobs Fly into China”, Seattle Times, June 7th, 2005 107 complacency on its part, perhaps causing it to overlook the fact that services and good personal relationships are the keys to winning the customers’ heart Yes, foothold in Asia Pac established, but faced with challenges from individual host countries and Airbus

34 Do we have the right partners?
Asia Pacific Airbus engages in industrial offset agreements with older Airbus models More difficulties faced in Japan than in China Boeing’s involvement in Japan: Establish leadership position in wing design and composite tech  Ability to deliver quality products, which is on par with US and European manufacturers Taking the position of a system integrator on the 787 program, Boeing had delegated the entire responsibility for wing design and production to its Japanese partners, while it also has assigned a significantly greater share of the work to the Chinese suppliers. In contrast, Airbus, while it also engages in industrial offset agreements, it has typically elected to do so in connection with the older Airbus aircraft models (Pritchard and MacPherson, 2005). This is probably a main reason explaining why Airbus seems to be facing many more difficulties in Japan than in China. Decades of technology development through extensive involvement in Boeing’s projects have helped the Japanese companies to establish a leadership position in wing design and composite technology. Now, Japanese companies, with government support, have set their sights on becoming a major force in aircraft manufacturing in competition with the U.S. and European producers. The fact that Airbus is still keeping in-house the development of its cutting-edge technologies82, such as composite materials and wing design, makes their cooperation with Airbus apparently less appealing. Although China is also eager to develop its aviation industry, it has a more urgent need: more jobs for local people. Hence, the one willing to offer more local job opportunities and develop local human resources is more likely to be received with greater favor. Furthermore, the friendly political relationships between China and E.U., along with Airbus’ own strong “PR machine” (as noted by one of the interviewees for this research) has also helped further Airbus’ sales in China. Meanwhile, Boeing’s long-term dominance in Asia may have led to some 82 “As Competition Heats up, Jobs Fly into China”, Seattle Times, June 7th, 2005 107 complacency on its part, perhaps causing it to overlook the fact that services and good personal relationships are the keys to winning the customers’ heart

35 Do we have the right partners?
However, Supply chain problems attributed to new revolutionary process AND product Same manufacturer for 777 and 787: Vought Aircraft Industries Vendor for 777- Aircraft Structural Components: Nose beams, bulkheads, longerons, edge frames Vendor for 787- Aft Fuselage But, inadequate vendor capabilities to cope with new technology required  Boeing had to buy out Vought’s share and follow up with changes. Utilizing learning points to refine global supply chain concept Difficult to control lower-tier vendors’ quality and process Not to backward integrate, but align and standardize process and quality standards throughout entire supplier network Cascade from first-tier vendors Best done with Starshine Assembly work was found to be completed incorrectly only after assemblies reached the FAL. Root causes are • Oversight not adequate for the high level of outsourcing in assembly and integration • Qualification of low-wage, trained-on-the-job workers that had no previous aerospace experience • Significant amount of change engineering work • Inadequate supplier capabilities in design, e.g. Vought had no engineering department when selected • Oversight not adequate for the high level of outsourcing in detailed design • Weight growth and subsequent weight saving changes • Producibility improvements • Late Definition • Boeing admitted responsibility for a shortfall in wiring shipments • Late specification indicated by supplier as root cause

36 Too much outsourced overseas?
Supply Chain problems that ensued Design Issues Weight Issues Engine Issues Certification Issues Production Issues Travelled Work Lay-up Rates Ramp Up Schedule Issues Parts Shortages • Fastener Shortage • Travelled Work • Conformity and Quality Assurance Issues • Configuration Control • Shop Floor Control • Late Definition • Engineering Changes • Production Ramp-up Issues During the product development stage, Boeing only provides high-level interface definition; it is the responsibility of the first-tier partnering suppliers to develop the detailed interface designs working together with the other major suppliers, where Boeing will act as the referee in the case of any conflicts. This means that there are substantially increased multilateral communication flows among the peer first-tier suppliers, as well as between each partnering supplier and Boeing. All lateral design and engineering interactions among the partnering suppliers, as well as the design interactions between each supplier and Boeing, is orchestrated through the use of the common information technology infrastructure electronically connecting all of the parties together. In order to reduce final assembly down to three days, Boeing has adopted a higher-level of integration at the supplier level, by significantly reducing the number of the parts and comp onents, subassemblies or sections that go into the final assembly stage. In addition, major suppliers have been selected to provide complementary components or systems that would 61 62 94 enable them to synergize their technical capabilities, resulting in much more efficient and effective design solutions. For example, Hamilton Sundstrand was awarded contracts including the environmental control system, electrical system, cabin pressurization, auxiliary power unit, ram air turbine and the other systems. The wide scope of the contracts allows Hamilton Sundstrand to subcontract the design work within each workpackage and across its divisions63. This means that the first-tier suppliers are moving upward in the value chain and assuming more the role of the system integrator. First-tier suppliers, therefore, can offer more integrated and interconnected solutions, decreasing the number of the components comprising the airplane. The first-tier partnering suppliers are also given full control of their own lower-tier supplier networks. The 787 program will be the first time when a first-tier supplier is given control of the selection of second and third-tier suppliers in a Boeing commercial aircraft program.

37 Too much outsourced overseas?
EXAMPLE: Travelled Work (Production Issues) 1. Assembly work was found to be completed incorrectly only after assemblies reached the final assembly line. Root causes are: • Oversight not adequate for the high level of outsourcing in assembly and integration • Qualification of low-wage, trained-on-the-job workers that had no previous aerospace experience 2. Significant amount of change engineering work • Inadequate supplier capabilities in design, e.g. Vought had no engineering department when selected • Oversight not adequate for the high level of outsourcing in detailed design • Weight growth and subsequent weight saving changes • Producitbility improvements 3. Late Definition • Boeing admitted responsibility for a shortfall in wiring shipments • Late specification indicated by supplier as root cause During the product development stage, Boeing only provides high-level interface definition; it is the responsibility of the first-tier partnering suppliers to develop the detailed interface designs working together with the other major suppliers, where Boeing will act as the referee in the case of any conflicts. This means that there are substantially increased multilateral communication flows among the peer first-tier suppliers, as well as between each partnering supplier and Boeing. All lateral design and engineering interactions among the partnering suppliers, as well as the design interactions between each supplier and Boeing, is orchestrated through the use of the common information technology infrastructure electronically connecting all of the parties together. In order to reduce final assembly down to three days, Boeing has adopted a higher-level of integration at the supplier level, by significantly reducing the number of the parts and comp onents, subassemblies or sections that go into the final assembly stage. In addition, major suppliers have been selected to provide complementary components or systems that would 61 62 94 enable them to synergize their technical capabilities, resulting in much more efficient and effective design solutions. For example, Hamilton Sundstrand was awarded contracts including the environmental control system, electrical system, cabin pressurization, auxiliary power unit, ram air turbine and the other systems. The wide scope of the contracts allows Hamilton Sundstrand to subcontract the design work within each workpackage and across its divisions63. This means that the first-tier suppliers are moving upward in the value chain and assuming more the role of the system integrator. First-tier suppliers, therefore, can offer more integrated and interconnected solutions, decreasing the number of the components comprising the airplane. The first-tier partnering suppliers are also given full control of their own lower-tier supplier networks. The 787 program will be the first time when a first-tier supplier is given control of the selection of second and third-tier suppliers in a Boeing commercial aircraft program. Source: Boeing 787 Lessons Learnt, October 2008, Burkhard Domke, Head of Engineering Intelligence, Airbus A need to implement more stringent selection and due diligence in checking first-tier vendor’s supplier network for future projects

38 Compensation Packages: Learning Points from 2008 Strikes’ Settlements
Estimated $685 million pretax profits lost in the Machinists’ Strike’s first 24 days (Boeing’s third quarter earnings, 2008) Adding in extra expenses incurred to recover to pre-strike rates of production Paying suppliers for overtime Expedited shipping etc Why Boeing needs to avoid a repeat of 2008 Strikes Source: The Seattle Times, Boeing, IAM (http://seattletimes.nwsource.com/html/boeingaerospace/ _machinists28.html) Joe Campbell, an analyst with Barclays Capital, said the details of Boeing's third-quarter earnings, released last week, give a window into the hit to company profits in the strike's first 24 days: about $685 million pretax, he estimated. Extrapolating from that figure, he said a strike of about 55 days would cost Boeing some $1.5 billion in profits. Adding in the extra expenses that Boeing will incur in recovering to pre-strike rates of production -- paying suppliers for overtime, expedited shipping and other extras, as well as the costs of additional delays on the the true cost of the strike is likely to be well above $2 billion, Campbell estimated. Key concerns of workforce “Leadership at the International Association of Machinists and Aerospace Workers had said Boeing's offer fell short in areas such as job-security commitments, cost of living adjustment rates and medical-plan expenses.”

39 Compensation Packages: Learning Points from 2008 Strikes’ Settlements
BEFORE AFTER General Wages Increase Raises of a total 11 percent over the life of the contract. Raises of a total 15 percent over the four years of the contract. Min wage Raised $2.28. Raised $2.28. In addition, recent hires get a supplemental raise to boost them past the entry level for new hires. Pension A basic monthly pension of $70 per year of contract A basic monthly pension of $81 per year of service for the first three years, $83 in the fourth year Lump-sum Bonus The greater of either $2,500 or 6 percent of gross pay including overtime, paid in the first year of the contract. The greater of either $5,000 or 10 percent of gross pay including overtime, paid in the first year of the contract. Company incentive-pay Plan As of 2010: 10 days' extra pay for reaching profit and productivity targets and up to 20 days' pay for exceeding them. Machinists not included Medical Plan changes In the traditional plan with zero monthly premium, out-of-pocket maximums would rise 50 percent for families. Monthly premiums for the HMO plan would drop 24 percent. No increases to employees’ costs The average Machinist, before the new contract, made about $55,000 a year before overtime. The average annual salary for engineers exceeds $88,000, according to Boeing. The average annual salary for technical employees is nearly $67,000. But engineers are in such demand at Boeing that many work a lot of overtime on programs such as the 787 and 747-8, and they can easily make upward of $100,00 a year before benefits and incentive pay are included. Boeing's Machinists agreed to a contract that included a 15 percent pay increase over four years, raised pensions and boosted starting pay. On the key issue of job security, which had been the major stumbling block, Boeing agreed to limit the amount of work that outside vendors can perform.

40 Holistic Compensation
Kerr (1975) recognized the existence of a divergence of goals and motives among members of the organization which led to non-similar outcomes. Often, subordinates respond to reward systems by displaying behavior they perceive as rewarding. The need for aligned performance and reward cultures with Boeing’ corporate growth strategies he should have gone much further than simply telling them what their goals were, helping them instead to genuinely understand why those objectives mattered to the business and to shareholders. He should have launched his program as a pilot and made it clear to employees that it would be refined based on their experience and input Go further than simply telling workforce, but to genuinely understand why these objectives mattered to the business. Launch compensation program and refine based on workforce's experiences and inputs

41 Boeing: Moonshine Shop
WHAT IS THE MOONSHINE SHOP? A lean manufacturing team that uses fast and inexpensive prototyping to develop and prove a concept, prior to full implementation Purpose: “to be creative, to solve problems, be creative with solutions” Combined: Lean manufacturing principles Cross-disciplinary teamwork Iterative, prototyping approach to new product and process design Changes to existing products and processes Brainstorming Try-storming

42 Boeing: Moonshine Shop
SUCCESS? Hay Loader on the Assembly Line The old crane & container process took one day-shift crew of 15 people & one night-shift crew of 15, with a total of 16 hours to install one set of passenger seats  Cost and time savings: Took 4 people minutes to install a full set of seats

43 BioFuels: The Complication of Delivery
Relies on cooperation of multiple parties – engine makers, airlines, energy co, aircraft manufacturers, airport operators, regulatory bodies Infrastructure to implement it requires investment and commitment BUT we recognize it diversifies source of fuels, green and responsible

44 BioFuels Future is already present – nothing groundbreaking, successful test flights aplenty BUT standards yet to be decided, testing, regulatory approval all in process GTL the most feasible near term alternative conventional fuel – BUT not environmentally friendly Summary: Continue focus on developing and ensuring leadership in 2nd Gen BioFuels that can be used in aviation

45 Why not revive the SonicCruiser?
Developed for speed, timeliness, and range Example for a Sydney-NYC Mission, it shaves 3hours per flight in a usual 21hr long flight The range of 9000nm, possibly 10,000 is demanded most premium customers ceteris paribus Cost despite mass production volumes of jetliners will increase from increase fuel consumption % more fuel burn- counter this point in time shorter economic boom-bust cycles make sonic this point in time a risk airlines not willing to take But possible in medium term Fuel technology for biofuels/alternatives/conventional fuel stablises to some new standard for aviation industry Material costs for largely composite frame deflated - moore's law Enough demand from consumers for speed, timeliness, willing to pay for airlines to order

46 Reasons for Outsourcing
Subsidies in developmental costs flowing from host country governments – indirectly subsidizing the development costs Partnership, alliance, equity alliance with local partners to enable deals to flow through (esp. Japan, China) Manufacturing no longer sustainable competitive advantage Focus is now on systems integration, design and other higher value chain work

47 Why not Backward Integration?
Integration time of at least 2-3 years disruptive to production focus on 787 Current critical issues resolved, thus enabling testing and certification process to begin Cultural and organization integration issues that will complicate integration Countries like Japan, China have foreign ownership restrictions on local companies

48 A350XWB v. B787

49 Cargo Airline: A Tight Market
Rising Fuel Costs Yields low due to Competitors No Customer Volume Overcapacity Tough Conditions Shine Wears Off Cargo Market

50 Importance of building right plane for airline industry

51 Commercial Aircraft Industry Analysis

52 StarShine Structure Airplane Prog (2) BD (2) Prod Dev (2) Starshine
Commercial Av Service (2) SCM (4) Sales (2) Engin (4) Finance (2)

53 StarShine Tasks Support strategic project processes
Offer recommendations on implementation plans Collaborate closely with project directors to help them develop good project proposals Provide assistance & support on the quality assessment, monitoring and evaluation of projects Undertake training programmes to build up skills in project management and capacity building Research latest trends in project management

54 Airframes and components
Nanotechnology Areas Airframes and components Coatings and paints Avionics and other systems Anti-scratch, anti-glare etc by depositing nanopowder based thin layers onto glass Nanoscale silver particles in filtration systems for higher air quality Corrosion and thermal protection Nanostructured coatings to prevent ice formation Carbon nanofibres proven to reduce the weight of wires by close to 4 times Cost efficiency

55 Valuation ChartSheet (In USD mil)
The DCF Valuation Valuation ChartSheet (In USD mil) 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F Net Profit 424.03 98.58 90.36 79.21 65.38 59.40 50.63 39.39 27.43 15.30 40.48 522.82 586.56 654.76 727.74 Plus: Depreciation & Amortization 0.00 Minus: Increase in Working Capital Minus: Capital Expenditure Operating Cash Flow Terminal Value 9,438.96 Discount 10.71% 0.90 0.82 0.74 0.67 0.60 0.54 0.49 0.44 0.40 0.36 0.33 0.29 0.27 0.24 0.22 Discounted Cash Flows 383.01 80.43 66.59 52.73 39.31 32.26 24.84 17.46 10.98 5.53 13.22 154.21 156.27 2,429.04 158.19 NPV 3,624.07

56 The Pro-Forma Income Statement
Prognosis (In USD Mil) Description 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F Revenue Commerical Airplanes 32,703.54 34,665.75 36,745.70 38,950.44 41,287.47 43,764.71 46,390.60 49,174.03 52,124.47 55,251.94 58,567.06 62,081.08 65,805.95 69,754.30 73,939.56 Integrated Defense Systems and Boeing Capital 33,804.81 34,122.57 34,443.32 34,767.09 35,093.90 35,423.78 35,756.77 36,092.88 36,432.15 36,774.62 37,120.30 37,469.23 37,821.44 38,176.96 38,535.82 Total Revenue 66,508.35 68,788.32 71,189.02 73,717.53 76,381.37 79,188.50 82,147.36 85,266.91 88,556.63 92,026.56 95,687.36 99,550.31 103,627.39 107,931.27 112,475.39 Expenses Cost of Products 45,797.65 47,367.64 49,020.76 50,761.89 52,596.21 54,529.20 56,566.67 58,714.80 60,980.09 63,369.49 65,890.31 68,550.34 71,357.82 74,321.47 77,450.55 Cost of Services 8,639.43 8,935.60 9,247.45 9,575.91 9,921.94 10,286.59 10,670.94 11,076.17 11,503.51 11,954.25 12,429.79 12,931.59 13,461.20 14,020.27 14,610.55 Capital Corp Int Exp 292.64 302.67 313.23 324.36 336.08 348.43 361.45 375.17 389.65 404.92 421.02 438.02 455.96 474.90 494.89 Equity in Income General/Admin. 3,695.71 3,673.42 3,804.67 3,982.62 4,203.33 4,298.92 4,438.80 4,618.23 4,809.22 5,002.85 5,189.18 5,397.55 5,622.44 5,857.99 6,103.91 Research/Development 4,258.45 4,575.30 4,866.57 5,141.11 5,004.58 5,289.97 5,534.37 5,759.29 5,967.12 6,158.41 6,430.51 6,698.12 6,970.63 7,254.16 7,555.73 Dispositions 0.00 Settlement with US Department Goodwill Impairment - Special Program Penalities Owed to Airlines 1,968.00 2,376.00 2,640.00 2,556.00 1,692.00 828.00 Total Operating Expense 64,443.07 67,004.11 69,651.69 72,100.76 73,510.04 75,323.20 77,302.76 80,264.18 83,361.22 86,590.52 90,048.40 93,690.44 97,529.83 101,576.82 105,848.75 Operating Profit 2,065.28 1,784.22 1,537.33 1,616.77 2,871.32 3,865.30 4,844.60 5,002.74 5,195.40 5,436.04 5,638.95 5,859.87 6,097.55 6,354.44 6,626.64 Minus Taxes 543.17 469.25 404.32 425.21 755.16 Net Profit 1,522.11 1,314.97 1,133.01 1,191.56 2,116.17 2,848.73 3,570.47 3,687.02 3,829.01 4,006.36 4,155.91 4,318.73 4,493.90 4,683.22 4,883.83

57 Delivery Schedule(1) Number of Deliveries for Planes 2005 2006 2007
2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F Matured Planes Model 717 13 5 - Model 737 212 302 330 290 372 387 402 418 434 Model 747 14 16 8 Model 757 2 Model 767 10 12 Model 777 40 65 83 61 88 91 94 97 100 Total Number of Matured Deliveries 398 441 375 481 500 517 536 555 Unit Cost of Matured Deliveries 73.67 71.52 76.59 78.55 72.33 New Development Model 787 (Delivered) 80 96 120 Orginal Deliveries 37 75 132 164 Cumulative Penalized Planes 112 244 328 396 440 Number of Penatly Months Penalty 0.5 Total Penalty Incurred 222 672 1,464 1,968 2,376 2,640 Assumes 6 Planes Each Month Assumes 8 Planes Each Month Assumes 10 Planes Each Month

58 The Flight Delivery Schedule(2)
Number of Deliveries for Planes 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F Matured Planes Model 717 - Model 737 451 469 487 506 526 546 567 589 612 636 660 Model 747 8 Model 757 Model 767 13 Model 777 103 107 111 115 119 123 127 131 135 140 145 Total Number of Matured Deliveries 575 597 619 642 666 690 715 741 768 797 826 Unit Cost of Matured Deliveries New Development Model 787 (Delivered) 144 138 100 Orginal Deliveries 130 Cumulative Penalized Planes 426 282 Number of Penatly Months 12 Penalty 0.5 Total Penalty Incurred 2,556 1,692 828 Assumes 12 Planes Each Month

59 Calculating the WACC I. Cost of Debt (Kd):
Estimated All-In Cost for Company 5.88% Effective Tax Rate (a) 26.03% Kd = 5.9% * ( %) = 4.35% II. Cost of Preferred (Kp): Estimated All-In Cost for Company (b) 0.00% No Preferred Debt III. Cost of Equity (Ke): Risk Free Rate (20-year T-Bond Yield) 3.40% Source: U.S. Department of Treasury Target Beta (c) 1.28 Beta-- Up 1.66 Beta-- Down 0.90 Market Return 8.52% Market Risk Premium (d) = (b) - (a) 5.12% Small Stock Premium (e) Country Risk Premium 2.00% ^ Rationale: A latent risk due to High Deficits Target Ke 11.95% IV. Weighted Average Cost of Capital (K): D/V 16.33% P/V E/V 83.67% Target WACC 10.71%

60 Calculation of the Cost of Debt
Corporate Bonds Issued by Boeing Name Maturity Date Amount (In USD Mil) Credit Quality Price Coupon % Coupon Type (Fixed/Floating) Callable Rule 144A Yield to Maturity Boeing Cap 5.8% 01/15/2013 600 High 109.7 5.8 Fixed Yes No 2.13 Boeing Cap 4.7% 10/27/2019 500 101.1 4.7 4.56 Boeing Cap 3.25% 10/27/2014 101.2 3.25 2.96 Boeing 6.875% 03/15/2039 116.1 6.875 5.73 Boeing 3.75% 11/20/2016 99.5 3.75 3.83 Boeing 5.875% 02/15/2040 450 101.7 5.875 5.76 Boeing 6.125% 02/15/2033 400 99.8 6.125 6.14 Boeing 8.75% 08/15/2021 130.5 8.75 5.16 Mcdonnell Douglas 9.75% 4/1/2012 350 110.9 9.75 3.9 Boeing 7.95% 08/15/2024 300 123.5 7.95 5.55 Boeing 6.625% 02/15/2038 107.5 6.625 6.06 09/15/2031 250 125.4 6.53 Boeing 7.25% 06/15/2025 247 113.6 7.25 5.88 Source: Morning Star

61 Effective Tax Rate Calculation of the Effective Tax Rate Description
Description 2005 2006 2007 2008 2009 Net Income Before Taxes 2819 3194 6118 3995 1731 Net Income After Taxes 2562 2206 4058 2654 1335 Effective Tax Rate 9.12% 30.93% 33.67% 33.57% 22.88% Average Effective Tax Rate 26.03% Source: Boeing Annual Reports

62 Re-Based Monthly Closing Price: S&P 500 and The Boeing Company
Overview of Boeing Re-Based Monthly Closing Price: S&P 500 and The Boeing Company Apr-2005 to Mar-2010 COMPANY SNAPSHOT Latest 12 Months(31-Mar-2010) Sales ($mm) Last 12 Months 68,281.0 Total Assets ($mm) 62,053.0 Return on Equity 320.14% Return on Assets 2.31% Current Data(26-Mar-2010) Price $72.59 Shares Outstanding (mm) 755.85 Market Value ($mm) 54,867.44 Price/Earnings Ratio 39.7 Price/Book Value Ratio 25.8 Dividend Yield Primary Earnings Per Share (LTM) $1.83 Source: OneSource

63 Profitability of Boeing

64 Stability of Boeing

65 Key Assumption 1: Opportunity Cost of USD 500 Mil a Year
Source: The Seattle Times

66 Key Assumption 2: Growth Rates
Company Industry Sector S&P 500 Sales (MRQ) vs Qtr. 1 Yr. Ago 41.64 4.98 -6.41 13.90 Sales (TTM) vs TTM 1 Yr. Ago 12.10 1.35 -7.28 1.88 Sales - 5 Yr. Growth Rate 5.84 8.11 6.15 6.39 Source: Reuters

67 Key Assumption 3: Positive Trends for Nanotechnology
Significant Developments Increased Commercial Testing Increased Filing of Patents Aviation technology takes off Using nanotechnology techniques to improve surfaces, making them resistant to ice accumulation. Margaret Blohm, advanced technology program leader, demonstrated how surfaces could be engineered to resist water and other liquids, making them "superhydrophobic," she said. She is also exploring ways to reduce ice adhesion, potentially preventing ice building on aircraft surfaces. Source: timesunion.com  Anti-Icing System Succeeds in Test Conditions One immediate use for Battelle’s innovative technology is coating unmanned aerial vehicles (UAVs). The vast majority don’t have anti-icing systems, which leads to cancelled missions—studies show about 12 percent—or sometimes even a crash after the wings become icy. A comprehensive worldwide database of consumer products incorporating Nanotechnology has been constructed and is being constantly updated by the Wilson Center’s “Project on Emerging Nanotechnologies”.3 In the period from March 2006 to May 2007, the number of products listed on the database more than doubled, from 212 to 475 and this growth seems set to continue. Source: Hoizon Scanning Intelligence Group


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